A Transaction-Efficiency Analysis of an Internet Retailing Supply Chain in the Music CD Industry*

Decision Sciences, Winter 2003 by Rabinovich, Elliot, Bailey, Joseph P, Carter, Craig R

Price P^sub b^ is published on the CD retailing site. Furthermore, for CD titles, P^sub s^ corresponds to the item's list price. The list price is often printed on the product itself and is also published at the retailing sites. Consistent with Bertrand competition, a list price is a benchmark, set by the producer, in this case the music label. In general, half of it covers transaction costs resulting from title exchanges involving publishers, wholesalers, retailers, and consumers (Kotha & Dooley, 1999).

Consequently, the P^sub s^-P^sub b^ disparity is measured through the percentage discount of the CD title's list price offered to consumers. The greater the title's percentage list price discount, the higher the transaction efficiency and the lower the transaction costs in the exchange. Furthermore, from the prior section, supply chain transaction efficiency in an Internet environment, as measured by list price discounts in the case of CDs, is affected by the ownership allocation across the supply chain and involved in sourcing the products at the time the consumer purchase takes place. This supply chain ownership allocation involved in sourcing a transacted CD title (henceforth used interchangeably with the term "sourcing location") corresponds to the supply chain echelon from where the title is transferred to the consumer once the purchasing process is completed. Consistent with transaction cost applications by Mallen (1973) and Spengler (1950) stemming from Coase (1937), this sourcing location is given by inventory ownership. Thus, inventory owned by the retailer, at the time the transaction with the shopper is executed, is sourced from the same supply chain echelon, irrespective of its physical location (e.g., retailer store or warehouse). Inventory owned by the wholesaler, at the time the transaction with the consumer is executed, is sourced from another echelon.

In Internet-based commerce, the sourcing location of CD titles in the supply chain is a function of the item's promised shipping lead time, defined as the amount of time promised to ship the item once it is ordered by the consumer. In the case of the Internet retailers analyzed, measurements of supply chain sourcing location were linked to the promised time in shipping (rather than delivering) the product to consumers, after an order is placed. Information about the linkage between supply chain sourcing location and promised shipping leadtime was obtained from the studied Internet retailers' shipping and handling policies, published online at the time data was collected. This information resulted in sourcing location taking on three possible ordinal values: 1 = In stock owned by the Internet retailer, 2 = In stock owned by the wholesaler, and 3 = In stock owned by the music label. Out of stock items, not available for sale through the Internet site, were not considered in the analysis.

This measurement is completely independent of the delivery method and delivery time involved in the transaction. That is, it is not a function of the amount of time involved in delivering the product after it has been shipped out to the consumer. The measurement exclusively captures product ownership information across supply chain echelons, as stated by the Internet retailer, at the time the transaction takes place. As a result, it is independent of the product's geographical location. Furthermore, because the measurement is independent of the shipping and handling method chosen by the customer to deliver the product, it is independent of logistics quality measures in the transaction. Also, because sourcing location is measured at the time of the transaction, its causal effect on list price discount is consistent with the theory and model.